Toolkit on LRED

CONTENTS
Introduction............................................................................................................ 3

CHAPTER 1: Laying the Foundations.................................................................. 5
• Understanding the meaning of LED
• Understanding what it means to prepare for and exercise LED
• Knowing what processes are involved in constructing an LED Strategy
• Knowing how to mobilise, research and assemble an LED Strategy
• Understanding the possible components and variations within an LED strategy

CHAPTER 2: Understanding the Policy Context for LED ................................. 19
• Knowledge of the constitutional and statutory mandates for LED
• Defining responsibilities of councillors for Local Economic Development – distinguishing
the roles of councillors and officials in municipalities
• Issues that district councillors need to be aware of in working to support LED
• Understanding what district municipalities can do to stimulate the Local Economy by
examining the extent and nature of what can be done to create jobs from the local level.

CHAPTER 3: The Building Blocks of LED Strategies ....................................... 29
• Understanding the local economy – its sectors and resources
• Strategic choices which promote or hinder poverty and job creation
• Identifying competitive advantage in the country, region, district and local municipality
• Understanding concepts such as value addition, multipliers, leverage, backward and
forward linkages, complementarities (of labour) and clustering.
• Fleshing out opportunities for job creation and increased community involvement in
infrastructure and private sector development e.g. subcontracting and tendering
• Identifying the major blockages to investment and poverty reduction

CHAPTER 4: Planning for LED ........................................................................... 49
• The components of LED strategies
• Strategic planning sessions – critical outcomes and decisions
• Mobilising for participation and partnerships
• Assigning territorial and sectoral roles across partners in LED processes
• Using LED plans to improving public confidence in municipalities

CHAPTER 5: Drawing up Action Plans .............................................................. 69
• Key Components of Action Plans
• Foundations for Implementation:
• Partnerships, Networking and Role Clarification
• Resources
• Management
• Some Components of Action Plans:
Intensification of Enterprise Support
Sustainable Developmental Community Investment
Integrated Development Programmes or IDPs

CHAPTER 6: Vigilance is the Price of Prosperity ........................................... 113
• Understanding the need for consistent and regular monitoring and evaluation
• Building knowledge of sound M and E techniques
• Deciding how to measure i.e. the complexities of measuring development
• Assigning responsibility for data collection and analysis
• Managing change processes in LED

CHAPTER 7: Funding the LED Process .......................................................... 139
Range of financial mechanisms to different types of local economic development projects.

Glossary of LED Terms ..................................................................................... 146

LED Resources .................................................................................................. 150

Toolkit for Local Economic Development Page 3

Introduction

This draft toolkit is designed as a practical set of resources to support
local government ofﬁcials, councillors and LED practitioners.
LED is a relatively new ﬁeld internationally and it is even more recent
in the South African context. The ideas and suggestions in this toolkit
therefore tackle issues from a basic and fundamental point of view.
In devising a framework and this toolkit, national government, in
particular, the department of provincial and local government, are
acknowledging the need for all actors at all levels of South African
society to shape their environment and economic destiny. The nature
of the challenges facing us suggests that creativity and innovation are
needed at all levels and from all groups in the country. Thus LED calls
for ‘all hands on deck.’
The South African economy and spatial arrangements carry many
hangovers from the past which still need substantive attention and
programmes if we are to build an equitable society. LED practitioners
and planners in particular, will need to apply their minds carefully if we
are to build equity and unleash opportunities.
As this toolkit is the foundation for LED, it acknowledges that local
players in an economy are best placed to determine appropriate
strategies to build and grow their economies. There are however a

Toolkit for Local Economic Development

multitude of resources, both technical and financial which are available
to local governments. Chapter 7 points to number of these. Linked to
these resources is the notion that LED is integrally related to policies
of national and provincial government.
The chapters and order of the text are designed to take practitioners
and others through the logical steps in assembling and implementing
LED structures and plans.
One of the areas that is not dealt with in this toolkit is the substantive
differences among city, town and rural economies. These differences
are alluded to though readers will need to unpack the specificities of
these types of economies in practice.
We wish you great creativity and success in assembling and testing
your LED interventions. Officials of dplg’s LED unit look forward to
your responses and comments.

Comments can be sent to:
Mr Alistair Fray
Senior Manager
dplg
535 Proes Street
Pretoria
Email: alistairf@dplg.gov.za
Tel: (012) 301-1058
Fax: (012) 323-3550


CHAPTER 1
LAYING THE FOUNDATIONS

• Understanding the meaning of LED

• Understanding what it means to prepare for and
exercise LED

• Knowing what processes are involved in constructing
an LED Strategy

• Knowing how to mobilise, research and assemble an
LED Strategy

• Understanding the possible components and
variations within an LED strategy


Roots of Local Economic Development (LED)
The concept of local economic
development arose in the context Globalisation is the process through
of globalisation. As trade expanded which trade barriers have been reduced
across the world, many producers of allowing goods and services to be traded
more freely around the world
goods and services faced competition
from producers and countries that
were able to provide goods and services at lower prices and sometimes better
quality.
Globalisation brings both opportunities and threats. The opportunities lie
in expanding trade beyond the boundaries of local and regional and national
boundaries through competitive production techniques, value addition to local
produce and innovation in local economies. The threats lie in our ability to adapt to
global economic forces and in having to produce goods and services at costs which
can compete on international markets. This means that the technology used and
standards of production need to meet international requirements.
South Africa is a young democracy that has a conservative economy history
which led to our economy being strongly rooted in commodities (e.g. minerals and
agricultural produce). While we do have some competence in the motor industry
and other forms of manufacturing, we still need to work on being more strongly
competitive at an international scale. During the apartheid era, the majority of
people were deprived of land, skills and opportunities to establish businesses. As a
result, we still face deep rooted challenges in re-building the economic competence
of the country.
Some of our disadvantages are that labour in South Africa is not highly skilled
and machinery and equipment sometimes have to be imported. Skilled labour
and equipment together build productivity which enable industries to compete.
Furthermore, currency ﬂuctuations and a weak Rand can imply that imports can
increase in price which then increases productions costs.
In adopting LED as a strategy, the South African government is encouraging people
at all levels of society to participate in economic decision making which explores
creativity and builds entrepreneurship at
Currency Fluctuations refers to the
all levels of society. Given the challenges
rise and fall in the value of the rand
that we face in job creation and poverty against other currencies.
eradication, LED builds a platform for
bringing ‘all hands on deck’ in working towards solutions. It is an acknowledgement
that creativity, innovation and involvement of all groups are needed and can


contribute to solutions.
Another important reason for adopting LED as a policy is the push to democratise
at all levels. LED can be described as
Decentralisation refers to functions
a decentralisation mechanism which
of government being handed over
allows local and regional governments
other tiers of government, e.g. local or
and their communities (business, provincial government
labour and society) to shape their
environments, improve competitiveness in their local economies and ensure that
infrastructure and services work well for industry and society. By adopting LED
strategies people in a local economy can work out ways of attracting investment to
grow the local economy and also start businesses which will retain income in their
area.
In Chapter 2 we will explore the policy context for LED in South Africa in more
depth.

What is local economic development (LED)?
As we implied above, LED recognises that people, business and governments
at local levels are best able to restructure economic situations that will stimulate
growth that is required to create jobs and thereby reduce poverty. In South Africa
it is important that LED processes work towards social and economic equality.
Under apartheid, the majority of South Africans were deprived of skills and
access to opportunities. This has led to widespread poverty and underdevelopment
among black South Africa. Thus building equity in society is an essential aspect of
development processes.
LED is the result of joint Private enterprise in a local economy includes
all large medium, small and micro enterprises.
planning by a municipality,
This expanded view means that large mining
its community and business
companies and factories as well the smallest
sectors. This means that all spaza shop or stall at a taxi rank is part of
economic forces in the local private enterprise in a local economy.
situation have to be brought
on board to identify resources, understand needs and work out plans to ﬁnd the
best ways of making the local economy fully functional, investor friendly and
competitively productive.
As a starting point it is important to recognise the sources of income and wealth
in society. Successful private enterprise and productive public-private partnerships
create wealth in local communities.


A positive or enabling business environment means that infrastructural services
must be reliable and that businesses must have convenient access to markets
and essential inputs into the business. It is also important that the regulatory
environment should be user-friendly. Suitable sites for business premises need to
be available to encourage businesses to remain in or to make new investments
in a local economy. Workers with the skills required for local sectors and industry
within manageable distance are also an asset to the business environment. The
safety of workers, raw materials and equipment in business are also important
to encourage businesses to continue investing in an economy. It is important to
recognise and cater for the support needs of business, i.e. ﬁnancial services,
business development consultants and other services that will enable businesses
to become more efﬁcient, productive and competitive.

Private enterprise however, requires a positive business enabling environment to
deliver prosperity.
• Municipal government has a key role in creating a favourable environment for
business development and success.
• By its nature, local economic development is a partnership between the business
sector, community interests and municipal government.

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• LED is usually strategically planned by local government along with its public
(other levels and agencies of government), private sector and community
partners.


Investment is an important element of LED. It involves new investment by
government and the private sector. Government investment would include
construction of transport, power, water and telecommunications infrastructure.
This creates a base for businesses and households to function well. Investment
by businesses means that new factories/plants, mines, farms, service industries
or trading premises are established, or new equipment is purchased. Both types
of investment are essential foundations for growth. While businesses purchasing
new equipment can lead to job creation, it can also lead to jobs being lost if
new technology needs less labour. In the context of LED, it means that planners
need to think of ways to attract new businesses to absorb the jobs that are lost.
Businesses work to maximise proﬁts and therefore planning for employment of
people in a local economy is an important part of LED.
Investing in skills and continuous learning in businesses is also essential for
building and maintaining comparative and competitive advantage.

• Implementation is carried out by the public, private and non-governmental
sectors according to their abilities and strengths.

GOVERNMENT

Each parner in
CO

the LED process brings
SS

resources and has needs to be
MM
E

fulfilled. LED plans capture the needs
SIN

and reflect how these needs will be met.
UN
BU

ITI
ES

LED

How to prepare for and effect LED
Each local situation has a different set of conditions that either improve or reduce
the prospects for local economic development, and it is these conditions that

Sharing a joint vision by all sectors is key
to a successful LED Strategy


determine the relative advantage of an area in its ability to attract, generate and
retain investment.
A community’s economic, social and physical resources will guide the design of,
and approach to, the implementation of a local economic development strategy. To
build a strong local economy, good practice proves that each community should
undertake joint information gathering processes to understand the nature and
structure of the local economy. This should be followed by analyses of the area’s
strengths, weaknesses, opportunities and threats. This will serve to highlight the
key issues and opportunities facing the local economy.

Economic Resources Combinations of land, minerals, skills and money

Social Resources Organisations, NGOs and educational institutions

Physical Resources Buildings and infrastructure as well as places of natural and historical
interest

Processes involved in
constructing an LED Strategy
Ideally, the development of an LED strategy will be an integral part of a broader
strategic planning process for a sub-national region, city, town or rural area. Effective
strategic planning ensures that priority issues are addressed and limited resources
are well targeted. The stepped planning process should be tailored to complement,
and correspond with, other local planning processes. The process is not rigid and
should be adapted to meet the needs of the individual community.

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In South Africa this means that national, provincial and local plans and policies
should be linked and complement each other.
In South Africa there are
�� at least three types of local
economies: cities, towns and
rural areas. Each of these
��
types has different economic
structures, resources and
�� types of economic activity.
The economies of cities
usually have a complex
�� and varied mix of mining,
processing, services, trade
and industries. Towns may have mining, processing, trade and feeder industries into
farming or mining. Rural areas may be dominated by farming though there could
mines close by as well. The factors which differentiates cities, towns and rural
areas is agglomeration or density of population, and scale or extent of economic
activity.

Mobilising for Research
and Assembling an LED Strategy
A community begins A community begins the LED strategy planning process by
identifying the people, public institutions, businesses, community organizations
and other groups with interests in the local economy. This is often led by the local
government, usually the mayor or city manager. The skills and resources that each
of these stakeholders bring to the strategy process provide important foundations
for success. It is important that the individuals and organizations have or are given
some basic knowledge of the workings of the city, town or rural economy.
A resource review is a necessary input to the strategy, and should include the
identiﬁcation of ﬁnancial, human and other capital resources that can contribute
to the LED strategy. Working groups and steering committees can be established
to ensure that both formal and informal structures are in place to support strategy
development and implementation. Other issues that need to be tackled in the early
stages include establishing LED staff teams and suitable political processes.

Local ownership involving all groups is essential for
successful LED


Each community has a unique set of local attributes that can advance or hinder
local economic development. These include its economic structure, its human
resource capacity to carry out economic development, and how conducive the local
government investment climate is to economic and business activity. The aim of the
local economy assessment is to identify the community’s strengths and weaknesses
including its human resource capacity, local government’s ‘friendliness’ to all types
of business activities from corporate to informal, and the opportunities and threats
facing the local economy.
The goal of the assessment is to create an economic profile of the community
that highlights the basis of its comparative and competitive advantage in relation
to neighbouring communities and other regional, national or international
competitors.
As part of the LED strategy, a shared economic vision for the community and
LED goals, objectives, programs, projects and action plans will be developed. This
process ensures that all major stakeholder groups are given the opportunity to define
what is to be achieved, how it is to be achieved, who will be responsible and the
timeframes associated with the implementation of the LED strategy.

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Most importantly, the LED strategy and action plans must be finely assessed
against the staff resource capacity to carry them out, as well as the budgetary
constraints. Ultimately, the strategy’s action plans should be incorporated into the
work and budgetary program of the local authority, and appropriate elements taken
on by other stakeholders (business associations, utilities, educational institutions,
etc.). The aim is to leverage strengths, overcome weaknesses, exploit opportunities
and deal with threats.
Strategy implementation is driven by the LED action plans. Ongoing monitoring


is provided through the formal structures identiﬁed and created in step one, and
evaluation of speciﬁc project outcomes ensures that the strategy continues to lead
to the achievement of the LED vision, goals and objectives. In undertaking strategy
implementation, it is important to identify and establish the appropriate institutions
to carry out the plans.
Good monitoring and evaluation techniques help to quantify outcomes, justify
expenditures, determine enhancements and adjustments, and develop good practices.
This information also feeds into the review of the complete LED strategy.

The LED strategy should be reviewed at least annually to ensure that it remains
relevant. It may be that conditions have changed or that the initial assessment was
incorrect to the local conditions. The LED strategy should evolve continuously to
respond to the ever changing competitive environment

Components And Variations
Within An LED Strategy
By actively reviewing their economic base, communities gain an understanding of
the opportunities for, and obstacles to, growth and investment. With this newfound
understanding, communities attempted to expand their economic and employment
base by devising and undertaking strategic programs and projects to remove
obstacles and facilitate investment. Today, local economies face an even greater set
of challenges at the international, national, regional and local levels.

Toolbox for Local Economic Development

International
Globalization increases both opportunities and competition for local investment. It
offers opportunities for local businesses to develop new markets but also presents
challenges from international competitors entering local markets. Multi-site, multi-
national manufacturing, banking and service corporations compete globally to find
cost efficient sites in which to locate.
Technologically advanced growth industries require highly specialized skills and
a supporting technology infrastructure, but increasingly all industrial and service
sectors needs highly specialized and specific skills and business environments.
Local conditions determine the relative advantage of an area and its ability to attract
and retain investment. Even small towns and their surrounding rural regions can
develop local economic opportunities at a national or international level by building
on their local economic strengths.

National
At the national level, macro-economic, fiscal and monetary reforms directly impact
the economy at the local level. National regulatory and legal frameworks such as
tax reform, telecommunications deregulation and environmental standards directly
influence the local business climate, either enhancing or reducing the potential for
local economic development. In many countries, national government functions
continue to be decentralized thereby increasing the responsibility of municipal
governments to retain and attract private industry.

Regional
Communities within and between regions often compete to attract external and local
investment. Opportunities exist for communities across regions to collaborate with
each other to help their economies grow, for example, by supporting infrastructure
or environmental improvements that demonstrate a broad regional impact. An
association of local municipalities or regional governments can serve to facilitate
these types of LED effort by acting as an intermediary between national and
municipal governments.
Metropolitan and Municipal
Businesses, both large and small, often choose to locate in urban areas because
of agglomeration economies (i.e., the benefits derived from sharing markets,
infrastructure, labour pools and information with other firms). The economic
advantage of urban areas depends significantly on the quality of urban governance
and management, and on the policies affecting the availability, or lack, of
electricity, transport, telecommunications, sanitation and developable urban land.
Factors affecting labour productivity in the local economy include the availability


and quality of housing, health and education services, skills, security, training
opportunities and public transport.
LED infrastructure comprises two main components, ‘hard’ physical infrastructure
incorporating roads, rail, water, sewerage and drainage systems, and energy and
telecommunications networks; and ‘soft’ infrastructure of social, cultural and
community facilities and capacity that enhance the quality of life and encourage
industry and business development.
‘Hard’ and ‘soft’ infrastructure factors are major determinants of a community’s
relative advantage. The quality and provision of ‘hard’ and ‘soft’ infrastructure
forms the cornerstone of a successful local economy. Metropolitan areas can offer
increasing opportunities through economies of scale and effort as a result of the size
of the physical and human capital available, as well as the size of its services and
internal market.
Uncoordinated and disparate institutional frameworks and planning bodies
in metropolitan areas can serve to undermine area-wide economic growth.
Metropolitan-wide LED agencies, consortia and networks can be created to address
these constraints. These innovative institutional frameworks, which represent the
interests of different municipalities and partner agencies in the same metropolitan
area, can bring beneﬁts to the key actors of each municipality (public departments,
business and civil society organizations). These frameworks can serve to unite
the efforts of different localities and increase LED results, and can strengthen
representation in higher levels of decision-making. This type of cooperation has
worked well for cities that belong to common market agreements or that have
common sector interests (i.e. Eurocities, Indonesian City Network, South African
Cities Network).
The most important and effective local economic development activity that a
municipality can undertake is to improve the regulatory processes and procedures
to which businesses are subjected by the municipality itself. A survey of most
municipalities would reveal a number of complex, poorly managed, expensive and
unnecessary business registration systems. By reducing these, a municipality can
quickly improve its local investment climate.


Disadvantaged Populations
and Informal Economy
In many countries, economic growth is determined not only by the formal economy
(the economic sectors that are legally registered and pay taxes) but also by the
informal economy (those activities that are not legally registered). In some cases
the size of the informal economy is greater than the formal economy, and it interacts
with the formal economy by supplying certain goods and services. The linkages
between the formal and informal sectors of the economy need to be understood and
considered in devising a local economic development strategy.
Communities and businesses increasingly recognize that a successful local
economy requires social, as well as economic, environmental and physical renewal.
In many cities, large numbers of low-income families work within the informal
economy. However, these informal activities are often low-growth activities as a
result of a lack of access to proper infrastructure and services (i.e., electricity, water,
and roads), regular means of ﬁnancing, information and skills.
The development of an LED strategy should recognize and accommodate the
constraints and opportunities of the informal economy so as to broaden the appeal of
a strategically planned LED strategy. It should also encourage wider social beneﬁts
for all a community’s economic and social sectors, both formal and informal,
disadvantaged and excluded.


Do a drawing to show how you understand LED


Do you agree with trade barriers being reduced? Write down points for and
against free trade.
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What challenges are there in LED for your local municipality?
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CHAPTER 2
UNDERSTANDING THE
POLICY CONTEXT
FOR LED

• Knowledge of the constitutional and statutory
mandates for LED

• Deﬁning responsibilities of councillors for Local
Economic Development – distinguishing the roles of
councillors and ofﬁcials in municipalities

• Issues that district councillors need to be aware of in
working to support LED

• Understanding what district municipalities can do to
stimulate the Local Economy by examining the extent
and nature of what can be done to create jobs from
the local level.


The role of local government in development comes from Section 152 of the South
African constitution.

The Constitutional Provisions
Section 152 (1) c states that one of the objects of local government is to promote
social and economic development. Expanding on the developmental duties of
municipalities, Section 153 goes on to state:

“A municipality must
a. structure and manage its administration, budgeting and planning processes,
to give priority to the basic needs of the community and to promote the social
and economic development of the community; and
b. participate in national and provincial development programmes.” (1)
These objectives are further articulated in the Municipal Systems Act 32 of 2000.
The stated priority function of this Act is “To provide for the core principles,
mechanisms and processes that are necessary to move progressively towards
the social and economic upliftment of local communities…” and more so “to
progressively build local government into an efficient, frontline development agency
capable of integrating the activities of all spheres of government for the overall
social and economic upliftment of communities”…
The primary means to give effect to these developmental roles is by undertaking
developmentally-oriented municipal planning which should ensure progress towards
Section 152 and 153 of the constitution (Chapter 5, sub-section 23, Municipal
Systems Act). Thus the Integrated Development Plan (IDP) of each municipality is
intended to reflect a “single inclusive and strategic plan for the development of the
municipality which links, integrates and co-ordinates plans and takes into account
proposals for the development of the municipality”.

Components of an
Integrated Development Plan (IDP)
An IDP must contain
• a vision for the municipality’s long term development emphasising most critical
development and internal transformation needs
• an assessment of existing levels of development including identification of
communities lacking basic municipal services

Source:
(1)
Municipal Systems Act 32 of 2000


• the council’s development priorities and objectives including LED aims and
internal transformation needs
• the council’s development strategies, to be aligned with national or provincial
sectoral plans and planning requirements (legislated and binding)
• a spatial development framework providing for land use management
• operational strategies
• disaster management plans

Status of an IDP
An IDP
• is the principal strategic plan with respect to planning, management and
development
• binds the executive authority of the municipality
• binds all other persons with respect to their duties in the IDP and the rights of
persons passed as a by-law.
Chapter 6 outlines the establishment of a performance management system.
Though not stated as such the PMS in theory, should reﬂect achievements of the
targets of the IDP.
As part of the process of planning an IDP, local governments are intended to
develop a culture of community participation (through the establishment of ward
committees). According to Chapter 4 of the Municipal Systems Act, a municipality
must encourage and create conditions for the local community to participate in the
preparation, implementation and review of its IDP, its PMS, the monitoring and
review of its performance, budget preparation and strategic decisions relating to the
provision of municipal services. In addition, municipalities should

“contribute to building the capacity of
• the local community to enable it to participate in the affairs of the municipality;
and
• councillors and staff to foster community participation; and
• use its resources, and annually allocate funds in its budgets, as may be
appropriate for the purpose of implementing (a) and (b) above.” (2)

This toolkit can be treated as one component that would be ﬁtting in terms
of the provisions of the Act as quoted above. The Act goes on to stipulate the
Source:
(2)


obligations with respect to mechanisms, processes and procedures to include
community participation ensuring the inclusion of those who are illiterate,
disabled or disadvantaged by gender or other causes. There are thus provisions for
communication and notifications and admission to public meetings.
Another relevant development reference in the Act relates to local government
building its capacity to perform its functions. This means that municipalities need
to ensure that councillors and officials understand the policies relating to LED. The
recently released, “Stimulating and Developing Local Economies” (dplg, 2006)
presents the National Framework for LED in South Africa. The provisions of this
framework document will be expanded below.
The reference to building its capacity also means that it is of prime importance
that municipalities and metros employ officials that are trained in LED. They also
need to employ technical professionals who can undertake key responsibilities in
urban and regional planning and studies in working out the competitive advantages
of local economies. In cases where such expertise does not exist, municipalities can
contract in researchers and planner with the appropriate skills.
Sub-section 74 of the Municipal Systems Act states that “provision may be
made for the promotion of local economic development through special tariffs for
categories of commercial and industrial users.” It must be remembered of course
that increasing tariffs increases the taxes and costs for businesses which in the long
run could impact on their competitiveness. This suggests that municipalities need
to be creative about how to fund LED. (See Chapter 7 of this toolkit for details of
different sources of funding for specific LED projects and programmes.)
It would be useful to note at this stage, that the major function of local government
in LED is to ensure that appropriate, user-friendly and fully functional infrastructure
exists to promote business development in the local area. The maintenance and
construction of infrastructure are funded mandates of local governments.
Furthermore, the central role of local government is to facilitate LED, which means
that it should hold consultative meetings and engage in planning and joint research
processes on how to promote the local economy. Holding meetings and supporting
research processes are not major cost items relative to the budgets available to most
municipalities.
The importance of community liaison is reiterated in the Municipal Structures
Act (117 of 1998). Sub-section 19 stipulates that a “council must strive within its
capacity to achieve the objectives set out in section 152 of the Constitution.
In view of this councils have to annually review the needs priorities and participatory


mechanisms of the communities they serve while also reviewing their own delivery
mechanisms and performance in meeting their constitutional objectives.

The National Framework for
LED in South Africa
The most important source for dplg’s recommendations on LED are contained in
the National Framework for LED in South Africa. (3)
Flowing from the evolving practice of LED described above and the South African
national context described below, there are nine (9) principles identiﬁed that guide
this framework. These are:
• Through a developmental approach, Government has a decisive role to play in
shaping the economic destiny of our country.
• Local Economic Development is an outcome of actions and interventions resulting
from local good governance and the constant improvement and integration of
national priorities and programs in local spaces.
• Inward investment from the state or private sector will only be effective where
the potential and competitive advantages of each area are known and exploited.
• Promoting robust and inclusive local economies requires the concerted,
coordinated action of all spheres and sectors of government centred on the
application and localisation of the principles espoused in the National Spatial
Development Perspective (NSDP).
• Locally owned appropriate solutions and strategies must emerge to support
national frameworks in both rural and urban local spaces and should promote
sustainable development and sustainable human settlements.
• South Africa competes in a global and increasingly integrated world economy
whose threats must be minimised and whose opportunities must be exploited.
• Private companies, including social enterprises and cooperatives, form the heart
of the economy and have a crucial role to play as partnerships with public and
community role players that will ultimately stimulate robust and inclusive local
economies.
• People are the single greatest resource and including all citizens in development
and increasing their skills through greater role playing leads to increased
opportunities for stimulating local economies.
• Local initiative and responsibility, energy, creativity, assertive leadership and
Source:
(3)
National Framework for LED in South Africa, plg, 2006, page 4


skills will ultimately unlock the latent potential in local economies and will
shape local spaces.
The framework states (4)
that the objectives and anticipated outcomes of LED
are:

Objectives of the framework:
• To shift towards a more strategic approach to the development of local
economies and to overcoming challenges and failures in respect of instances
where municipalities themselves try to manage a litany of non-viable projects or
start-ups.
• To support local economies in realising their optimal potentials and making local
communities active participants in the economy of the country.
• To elevate the importance and centrality of effectively functioning local
economies in growing the national economy.
• To wage the national fight against poverty more effectively through local level
debates, strategies and actions.
• To improve community access to economic initiatives, support programmes and
information.
• To improve the coordination of economic development planning and
implementation across government and between government and non-
governmental actors.
• To build greater awareness about the importance and role of localities and
regions which globally are playing an increasingly significant role as points of
investment facilitated by supportive national policies.

Outcomes of the framework over the five years:
• Analysis of the 52 district and metro municipal economies undertaken and shared
understanding across government of the challenges and potentials of these areas
developed.
• The competitive advantage of all District and Metro municipalities are identified,
incorporated into its LED strategy and exploited.
• All District and Metro municipalities have credible LED programs, which are
being effectively implemented by a dedicated local economic development unit
or similar entity.
• All Local Municipalities have at least one staff member (at least qualified through
the LGSETA LED Learnership) dedicated to coordinating inputs that strengthen

Source:
(4)
National Framework for LED in South Africa, dplg, 2006, page 5


the local economy.
• The implementation of the IGRF Act and the effective utilisation of IGR structures
occur to encourage and facilitate discussion and joint economic planning among
municipalities and with Provincial and National Government.
• All municipalities have innovative spatial development strategies, land-use
polices, by-laws and implementation capacity to facilitate fast and effective
business establishment and functioning, especially for informal/street traders,
and SMEs.
• All municipalities have at least one public-private partnership through which a
major investment is being implemented.
• A national excellence centre for monitoring, learning and research in local and
regional economies is established.
The role of national government in the framework is to set the scene for local
economies to make decisions that will promote prosperity on the ground. Thus the
focus is on enabling local leaders, communities, businesses, NGOs, organised labour
and other organised groups to realise their collective objectives. In this context, the
state sees its role as facilitator, networker, and monitor. There is recognition that
a pure market solution is not likely to absorb labour or reduce poverty. Thus LED
efforts are expected to design solutions which national and provincial government
will work to support.
Municipalities are to play a connector role in LED mobilising resources from
national government departments. E.g. funds for skilling can be drawn from the
SETAs and support can be obtained from SEDA to assist with the growth and
retention of enterprises in their areas. There are also NGOS which can be tapped
into for resources.
Municipalities are not intended to run programmes but to create platforms for
building partnerships and networking.
LED is an important instrument for putting the “peoples’ contract” into action:
• a territorial concept assuming synergy and partnership among local
stakeholders
• through LED people can work towards sustainable growth and development that
improves the quality of life
• LED can be the implementation component of a range of government policies
e.g. the Microeconomic Reform Strategy, (MERS), the National Spatial
Development Programme (NSDP) and the Expanded Public Works Programme
(EPWP)


The metros themselves must be capacitated fully to understand the opportunities
arising from the policies and instruments provided by national and provincial
governments.

Visions of LED
The definition of LED by the World Bank implies that it is primarily a process
by which public, business and non-government sectors work together to create an
enabling environment for economic growth and employment creation to improve
everyone’s quality of life.
Practicing LED means:
• Improving economic capacity to improve the future of the local economy; and
• Increasing the productive capacity of local industries, mines, farms, firms,
entrepreneurs and workers to improve and build competitive strength.
A strong economy can be built by identifying local strengths and threats. The
strengths of the local economy will form the basis for an LED strategy. Each
community can then undertake a collaborative process to act on its strengths,
weaknesses, opportunities and threats (SWOTs) and build the attractiveness of its
area.
Successful private enterprises (and productive public-private partnerships) create
wealth and this depends on favourable local conditions. Local governments thus
have an essential role in creating favourable environments for business success
through its partnership among itself, business and community interests.
While local government has a role in socio-economic development, it is not
directly responsible for creating jobs. Rather, it should take active steps to create an
environment in which sustainable jobs can be created.
Every effort must be made at national level to ensure that there is access to
finance in the form of loans or loans mixed with grants, to enable small producers
to establish and grow their businesses. Negotiations should be held with banks to
deliver on the provisions of the Financial Sector Charter. At the same time the new
legislation to permit local co-operative and dedicated banks for savings and credit
must be accelerated.
The National LED Forum should work towards co-ordination of funding and
finance for LED and creation of multi-sourced funding streams and also improve
sustainable access to investment finance to build local competitive advantage.
Source:
(5)
Primer on LED, World Bank, 2006


Provinces, through their development agencies, must play a role in seeking to
facilitate ﬁnance for small producers, either directly or through agreements with
ﬁnance institutions.
The metros themselves must be capacitated fully to understand the opportunities
arising from the policies and instruments provided by national and provincial
governments.

Bibliography:
Constitution of the Republic of South Africa


www.worldbank.org: Primer on LED, 2006


What are the implications of the above legislation and policies for you?
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CHAPTER 3
THE BUILDING BLOCKS OF
LED STRATEGIES

• Understanding the local economy – its sectors and
resources

• Strategic choices which promote or hinder poverty
and job creation

• Identifying competitive advantage in the country,
region, district and local municipality

• Understanding concepts such as value addition,
multipliers, leverage, backward and forward linkages,
complementarities (of labour) and clustering.

• Fleshing out opportunities for job creation and
increased community involvement in infrastructure
and private sector development e.g. subcontracting
and tendering

• Identifying the major blockages to investment and
poverty reduction


Understanding the local economy –
its sectors and resources
Economics studies the uses of resources that are available, how we use them and the
allocation of the gains from production and services across society. In any society,
country and local economy, there are varying degrees of resources. Resources
are scarce commodities that have to be managed and safeguarded if society is to
continue gaining beneﬁts from their use, e.g. water, minerals, soil and oil.
There are three basic resources: land, labour and capital. We use land to produce
food and inputs into industrial production. Where land has minerals we mine it for
use in industry and for other uses. We apply labour to produce goods and services
for markets. We use capital, money and machinery to buy things that are needed for
production and services and to pay labour. The method of production that we use
is the technology.
Technology: In early economic thinking, technology was considered as the
interaction between labour and capital. In the last forty years as computers and
machinery have become more sophisticated, technology has become a factor of
production. The increasing use of technology has led to a decline in the use of
labour around the world. This is one of the key reasons that unemployment has
increased.
Infrastructure: Another key resource in industrial and economic development
is infrastructure. Industries, farms and mines cannot function without access to
reliable “hard” infrastructure. This means that electricity, water and sanitation
services, refuse removal and transport infrastructure are an integral part of the
ability of the economy to function well and to grow. The recent power failures in
the Western Cape are an example of how breakdowns in infrastructure can cause
losses in industrial production. Planners need to make sure that infrastructure works
well for current needs and also has excess capacity to cater for growth.
Land: Closely aligned with infrastructural needs is the availability of sites and
zoning for industries, processing, trade and service activities in the economy.
As local government plays a key role in deciding on land use management and
regulating land use, spatial planning is a critical input into LED.

Technology
Land Goods and
services
Labour
produced by the
Capital economy
Infrastructure


Skills: The extent of skills available in an economy is often a key determinant of
employment levels. Skills have risen in importance to the point where we now
speak of a ‘knowledge economy.’ The
skills however have to be applicable to For example: Food, clothing and
the types of employment opportunities housing for the mineworkers, engineers
and others, people to maintain and
that are available. E.g. where there
repair machinery and equipment, etc.
are minerals, the skills required are
in mining engineering, geology and
economics. In addition, mines will need construction skills to construct and prop
underground tunnels, machinery and skills to transport minerals. Alongside these
key skill areas, there will be a need for a range of support services.
The same logic can be applied to the use of land for agriculture or of natural and
cultural resources for tourism. In each sector, there are a host of goods and services
that are needed alongside the lead sector to provide for the needs of industry and
households.
It is also important to note that resources have to be renewed and have a lifespan,
i.e. mines only have a limited amount of minerals to be extracted and land has to be
regularly fertilised to continue being productive or there has to be rest periods in the
use of land or rotation of crops and grazing to keep the ground productive.
The presence of natural, human and cultural resources, along with the
capital and technology to use for the benefit of society, are the major factors
in working out the lead sectors in any economy. e.g. If an area has arable land
it could be suitable for some types
Think of a sector as a field of
of agriculture. The use of the term,
specialised activity in an economy.
‘some’ suggests that certain types land Thus agriculture, mining, tourism,
is suitable for specific types of crops construction, etc are all areas of
or animal rearing. The potential for specialisation.
agriculture is dependent on water that
is available, the costs of piping water and the availability of farming knowledge,
seeds and farming equipment.
The presence and efficient use of natural or other resources become the source of
comparative advantage in an economy.
This brings us to another essential link for successful producers; there have to be
markets or effective demand to sell the goods. The more the demand the stronger
are the opportunities for growth in any sector. Growth in one sector leads to growth
across other sectors. When we measure growth across an economy, we calculate the
percentage change in performance from one period to the next.


Thus when we work on growing an economy, we think about ways in which we
can identify where and what types of demand or needs exist and how we can meet
those needs.
Meeting needs and seeking more and different markets implies that we have to be
able to produce better quality at lower prices in order to compete on local, national
or international markets. Our choice of market decides the extent of demand that
we can cater for. However, as we mentioned earlier, we live in a world where
trade barriers have all but dissolved. Goods and services are reaching countries
across great distances. E.g. Kenyans are growing vegetables which are being used
to make salads that are sold fresh in supermarkets in London the morning after the
vegetables have been picked and the salads made. Small scale Kenyan farmers have
identified that Indians like certain types of vegetables. As Indian technical people
and business owners now reside in many different places in the world, they grow
these vegetables and they are flown to places where Indian markets exist. As land is
scarce and labour is expensive in Europe, Kenyans are also growing flowers which
are being exported to Europe.
These examples illustrate that opportunities for niche markets exist in many
forms that may not be immediately visible to us. Niche markets may be large or
small though their success depends on A niche market is one where special
the buying power of the market that is tastes are catered for or specialised
targeted or the size of industry to which services are required.
the market is linked. It also shows us
that where resources and skills exist, it is possible to diversify into markets we may
not have imagined.
Another example in this context is the increase in business process outsourcing.
Outsourcing refers to handing over some parts of a production or service to another
company. Companies do this as means of building specialisation and efficiency
which simplifies management and thereby can also reduce costs.
One growing example of outsourcing is the use of call centres to provide information
and perform IT and telecommunications services which customers require. Thus
banks, insurance companies, medical aids, revenue services and even municipalities
are increasingly using call centres to cater for aspects of customer needs. Again as
people are highly skilled which leads to high labour costs, companies in Europe
and the United Kingdom are outsourcing their call centre functions to countries
where labour costs less. As result, some British banks have call centres in India. In
South Africa, call centres have become a growing area which is creating significant
numbers of new jobs. The need for call centres depends on the extent of scale. Scale
refers to the numbers of customers a business has.


Thus far we have established that Comparative advantage refers to the
identifying the primary resources in combination of factors that people or
an economy gives us information economies have that places them in a
about potential lead sectors. We have stronger position. Thus a local economy
also established that the linkages with more technically skilled people in
and efficient use of capital (money a local industry using local resources
has a comparative advantage in that
and machines), natural resources,
particular industry.
labour (knowledge), technology
and infrastructure are key factors in
building up comparative advantage in an economy.
In the illustration below, production factors are used by firms and households to

Households

Waste Factor markets Prices Goods markets

Firms

produce goods which are exchanged in markets.
While comparative advantage is a useful starting point it is not necessarily a
guarantee of success. As we live in a world with high levels of competition, we need
to build competitive advantage, i.e. be more efficient at producing the same goods
and services at better prices and quality than other economies. This will enable us to
build competitive advantage. We will explore this further in a later section.

When we think about developing local economies, it is useful to think about
building livelihoods rather than just creating jobs. Employment gives people an
income. We need more than just to be able to earn a living. A healthy society
considers and creates the means for people to enjoy a healthy lifestyle and
be able to grow themselves in a variety of ways. This would include facilities to
learn, play, be entertained, socialise, pray, be healed and participate in creating
a community in which we believe. The presence of these facilities creates jobs
and more importantly, attracts people and investment.


Strategic choices that will promote or hinder
poverty and job creation
An economy is able to produce or render services with the resources it has available.
Therefore a starting point for understanding the advantages we have is to assess the
resources that we have available and who wants to buy them from us. Here our
perception of resources in the context of local economies starts to become broader
than the basic resources we identified above.
When thinking of resources in a local economy we should therefore consider
the social, human, natural, physical, and financial resources that we have in an
economy. These are explained in Table 1.

Table 1
Social Resources Social resources refer to schools, hospitals, policing, social services,
organised community groups, churches (and other places to worship),
social and entertainment facilities
Natural Resources Natural resources are features which occur in nature: land for grazing and
cultivation, minerals or natural features which will attract visitors
Human Resources Human resources or human capital is measured by the extent of skills that
are present in an economy and the skills to provide social services
Physical Resources Physical resources refer to the buildings, housing, social facilities and
different types of infrastructure
Financial Resources Financial resources includes the range of financial services that people
living in an area require as well the instruments and finance required by
businesses and government

Thus if an assessment of resources available to a local economy is being conducted,
the above resources should be included along with the sectors that dominate in the
economy and the extent of economic activity in the area.
While an area may have extensive natural resources which promote activity in
mining, tourism or farming, the extent of skill in combination with other resources,
in the area determines the extent of exploitation of those resources that is possible.
The use of labour versus equipment in a sector or industry determines the extent
of job creation that is possible. Thus we differentiate between more and less labour
intensity in certain sectors. E.g. the use of earth moving equipment in construction
minimises the use of labour. It is technically possible to select techniques that
promote or hinder the extent of labour intensity. This however should be balanced
against efficiency, or time taken to accomplish some functions.
It is not always prudent to substitute labour for machines as this could affect the


competitiveness of products or services. If a bank teller had to calculate manually
every time a transaction was conducted, the queues in banks would be much longer.
It is also safer for customers that transactions are recorded electronically as they
done. In short we have to examine the choices carefully to suit the task, the nature
of the product and the markets for which they are intended.
In a number of cases, NGOs and private businesses are working with rural
communities to produce mementos for tourists. These tend to be labour intensive
and can earn regular income. But if we consider that the tourist market is a limited
one and we work out ways to improve the standards and methods of production,
their goods could be used to seek international markets. There are cases where
this is occurring in the country. If the same producers also diversify the product
range into more utility or domestic items, the markets can be extended even further.
With a local cultural flavour added to goods, they sell the South African brand and
make use of global or much broader markets. This is how we can capitalise on
globalisation.
In cases where local producers are given the opportunity to acquire international
production standards (through the SABS – South African Bureau of Standards), they
stand stronger chances of integrating into broader local, regional and international
markets.
Another area where local governments can support job creation is to combine
infrastructure development with skills programmes. This has been the norm on large
scale projects where local businesses are taught how to become building contracting
companies who are able to tender for further work after the life of the initial project.
A possible addition to this process is the training of artisans. As larger companies
manage the construction of infrastructure, and these projects extend over a few
years, artisans can be given the skills, experience and qualifications through the life
of these projects. Engendering qualifications enables people to find better paying
jobs or to create their own employment with additional business management and
marketing skills.
It is important to remember that skills are valuable in assessing competence in an
economy but it must be noted that the more the skills are linked into the dominant
sectors in the local economy, the stronger the chances of building that economy.
It is also useful to not that for every skilled job other jobs are created, e.g. when a
person is trained as a bricklayer and is employed there are jobs for brick makers,
concrete mixers, transporters and others. This is known as complementary jobs.


Identifying competitive advantage in the country,
region, district and local municipality
The concept of value addition is useful to consider at this stage. E.g. South Africa
mines a variety of precious metals and semi-precious stones. The extent of processing
these stones and metals varies across the value chain. Some semi-precious stones are
cut and polished in different countries in Asia and exported to other countries in the
world. This is due to the Asian countries having a competitive advantage in cutting
and polishing skills and technology. If we could develop the skills and acquire the
technology locally and sell at prices which could compete with Asian producers, we
could build competitive advantage in the semi-precious stone market.
In order to identify the competitive advantage of each segment (country, region or
local) the structure of the local economy must be understood. This is best done by
conducting a comparative analysis of towns or cities in order to determine whether
the town’s economy is relatively specialized, and changes in the local economy’s
Gross Geographic Product will indicate whether the town is growing or declining.
On the other hand, changes in employment within each sector that contributes to
economic output will highlight any imbalances between sectors.
Other variables that can be considered include changes in the number of
establishments per sector, the size and class of firms per sector and the number and
contribution of SMMEs to economic output by sector and size class. This will give
an illustration of the economic prominence of each sector and class size.
Local and regional-level analysis is an important ingredient for long-term strategy
building and planning. Structured analysis with regard to trends, potentials, threats
etc. is specifically important when looking at the bigger region and should be more
than just a summary or aggregation of local-level analysis.
In some places regional planning and management instruments are used by the
public sector (e.g. the district IDPs in South Africa). The use and results of these
analyses should be made an integral part of the preparation for and understanding
of competitive advantage.

Value chains, backward and forward linkages,
complementarily and clustering
A value chain refers to activities undertaken to bring a product from its conception
to its end use and beyond. This includes activities such as input provision, design,
production, marketing, distribution and support to the final consumer. In some
instances few firms in the link control certain links in the chain. In other cases many


firms provide different functions or links in the chain. Activities can be contained
within a single geographical location or spread over wider areas or even continents.
One link in the chain can represent thousands of firms or could refer to one firm
only.

Value chain analysis, cluster analysis and sub-sector analysis look at the
competitiveness of local firms in certain sectors and value chains. Value
chain analysis, cluster analysis and sub-sector analysis are often used
interchangeably, and they often use similar methods or instruments for
analysis. Despite the similarities they are still recognized as distinct fields in
development. This being said, ideas, concepts and instruments are constantly
flowing between these fields.

A Simple Value Chain:

Dairy Farming Milk Butter Cheese Exports to other
regions and
Cattle Feed Packaging Transport countries

The illustration above shows us how diary farming can lead into value addition
activities in the production of milk, butter and different cheeses. There are also
complementary activities which are stimulated through packaging industries and
specialised transport services which are required.
Value chains are an important means of linking rural or small firms with regional
or global markets. Small and rural firms are increasingly under competition from
global firms that are part of or supplied by highly organized value chains, as they
are often unable to organize themselves in an efficient way to be able to respond to
increasing competition from better organized value chains.
From a local and regional perspective, value chains deal with the way small firms
interact and form part of the bigger economic systems.
The terms value chains or sub-sectors are often used interchangeably. Sub-sector
analysis is the methodology by which the structure and processes of a sub- sector
are understood. A key concept within sub-sector analysis is leverage; that small
focused inputs can generate commensurately larger outputs. This recognizes that
development agencies cannot afford to work with small firms on an individual basis
and that therefore they must seek to make interventions that can influence large
numbers of firms with a single stroke.
Value chain analysis or VCA also has strong links to the approach of cluster
development. The concept of clusters as a “sectoral and geographical concentration
of enterprises” is described by Michael Porter in his book, the Competitive


Advantage of Nations, as “geographically close groups of interconnected companies
and associated institutions in a particular field, linked by common technologies and
skills. They normally exist within a geographic area where ease of communication,
logistics and personal interaction is possible. Clusters are normally concentrated
in regions and sometimes in a single town”. From the definition above it becomes
apparent that cluster and sub-sector analysis is closely related, and that a clusters
can also form part of a value chain.
Understanding the concepts of value chains, sub-sectors and clusters will allow
for development of strategies that promote inter-firm cooperation to collectively
improve the efficiency of participating enterprises.
Clustering and networking is particularly pursued in response to competitiveness
constraints arising from small firm size, resulting in:
• Cost sharing and participating for more effective innovation and research and
development or R&D
• More effective advocacy (influencing policy making) and buyer/supplier
negotiation
• Improved access to inputs and services
• More efficient marketing and market access opening possibilities for increased
specialisation
Value chains and sub-sectors have potential to improve technology for some
components or the upgrading of certain parts of the system, resulting in increased
opportunities. This has further potential for unlocking opportunities in niche markets
or switching from one industry to another more profitable one. Examples can be a
group of manufacturers that switches to the profitable motor industry, or a group of
nurseries switch from traditional garden plants to medicinal plants.


Value chain integration (5)
INTERVENTION AREA KEY STRATEGIES & PROCESSES OPTIONS / WAYS TO IMPLEMENT
Clusters Improve the competitiveness and Conduct a cluster assessment that
performance of a given cluster in an investigates the information flows,
area relationship, technology usage etc.
Identify opportunities to upgrade or
opportunities to share resources.
Establish a network broker or joint
resource centres
Value chain Improve the performance of a group of Conduct a value chain assessment
firms within a value chain through the that indicates product flow, information
improvement of the value chain and relationships and supporting
actors
Analyze for opportunities and
obstacles that can be addressed
Sub Sector Improve the performance of a sub-sector Conduct a sub sector analysis to
with a specific emphasis on small firms identify constraints and obstacles in
order to stimulate growth
Identify business services used in
the sub-sector that could improve the
performance further (see Business
service cornerstone)
Improve public support Identify the resource and infrastructure Develop special hard and soft
to specific sub-sectors needs of the target sectors and mobilize infrastructure
or clusters (see also the public sector to support them Promote special interests to other
next cornerstone on government actors (e.g. Universities)
Investment promotion)
Create incentives for investment
Creating networks or Connect businesses in order to create Identify a host organization that
sector facilitators or economies of scale, or to optimize can act as a relationship broker and
marketing body resource usage facilitator between businesse
Identify potential markets and promote Develop a marketing body that
products to them while at the same time promotes and markets the products of
communicating market opportunities the sub-sector, cluster or value chain
back to the sector component
Strengthen the support Align supporting institutions and Involve and focus supporting
to a sector or cluster business services to support growth institutions on growth opportunities
in order to improve the and competitiveness Mobilize business service sector
institutional layer around new opportunities
Improve the visibility and Raise awareness of the sector to See next cornerstone
branding of the sectors potential investors and to end markets
Attract more supporting businesses and
institutions to locality

Source
(5)
Local Economic Development Strategic Planning and Practice Casebook, Cities of Change -World Bank


Porter’s Five Forces Analysis
Assessing the Balance of Power in a Business Situation
The Porter’s 5 Forces tool is a simple but powerful tool for understanding where
power lies in a business situation. This is useful, because it helps us understand both
the strength of the current competitive position, and the strength of a position we’re
looking to move into.
With a clear understanding of where power lies, we can take fair advantage of
a situation of strength, improve a situation of weakness, and avoid taking wrong
steps. This makes it an important part of a planning toolkit.
Conventionally, the tool is used to identify whether new products, services or
businesses have the potential to be profitable. However it can be very illuminating
when used to understand the balance of power in other situations.

How to use the tool:
Five Forces Analysis assumes that there are five important forces that determine
competitive power in a situation. These are:

1 Here you assess how easy it is for suppliers to drive up prices. This is driven by the
number of suppliers of each key input, the uniqueness of their product or service,
Supplier their strength and control over you, the cost of switching from one to another, and
Power: so on. The fewer the supplier choices you have, and the more you need suppliers’
help, the more powerful your suppliers are.
2 Here we ask how easy it is for buyers to drive prices down. Again, this is driven by
the number of buyers, the importance of each individual buyer to businesses, the
Buyer cost to them of switching from your products and services to those of someone
Power: else, and so on. If you deal with few, powerful buyers, they are often able to dictate
terms to you.
3 What is important here is the number and capability of competitors – if there are
many competitors, and they offer equally attractive products and services, then it is
most likely that local business will have little power in the situation. If suppliers and
buyers don’t get a good deal, they’ll go elsewhere. On the other hand, if no-one else
can do what is done in your local economy, then there is tremendous strength.
4 This is affected by the ability of customers to find a different way of doing what
you do – for example, if you supply a unique software product that automates an
Threat of important process, people may substitute by doing the process manually or by
outsourcing it. If substitution is easy and substitution is viable, then this weakens
your power.
5 Power is also affected by the ability of people to enter the market. If it costs little
in time or money to enter the market and compete effectively, if there are few
Threat of economies of scale in place, or if there is little protection for key technologies, then
New Entry: new competitors can quickly enter the market and weaken position of the local
industry. If there are strong and durable barriers to entry, then the local industry can
preserve a favourable position and take fair advantage of it.


These forces can be neatly brought together in a diagram like Porter’s Five
Forces. (6)

To use the tool to understand the local economic situation, look at each of these
forces one-by-one.
Brainstorm the relevant factors for the local market or situation, and then check
against the factors listed for the force in the diagram above.
Then look at the situation that is present using this analysis and think through how
it affects your local economy. Bear in mind that few situations are perfect; however
use environmental scan as a framework for thinking through what can be done
change to increase power with respect to each force.

Example:
Dineo Mahlati is deciding whether to switch careers and become a farmer – she’s
always loved the countryside, and wants to switch to a career where she’s her own
boss. She creates the following Five Forces Analysis as she thinks the situation

(6)
This tool was created by Harvard Business School professor, Michael Porter, to analyze the attractiveness
and likely-proﬁtability of an industry. Since publication, it has become one of the most important business
strategy tools. The classic article which introduces it is “How Competitive Forces Shape Strategy” in Harvard
Business Review 57, March – April 1979, pages 86-93.


through:
This worries her:
• The threat of new entry is quite high: if anyone looks as if they’re making a
sustained profit, new competitors can come into the industry easily, reducing
profits;
• Competitive rivalry is extremely high: if someone raises prices, they’ll be quickly
undercut. Intense competition puts strong downward pressure on prices;
• Buyer Power is strong, again implying strong downward pressure on prices;
and
• There is some threat of substitution.
Unless she is able to find some way of changing this situation, this looks like a
very tough industry to survive in. Maybe she’ll need to specialise in a sector of the
market that’s protected from some of these forces, or find a related business that’s
in a stronger position.

Key points:
Porter’s Five Forces Analysis is an important tool for assessing the potential for


profitability in an industry. With a little adaptation, it is also useful as a way of
assessing the balance of power in more general situations.
It works by looking at the strength of five important forces that affect
competition:
Supplier Power: The power of suppliers to drive up the prices of inputs;
Buyer Power: The power of your customers to drive down prices;
Competitive Rivalry: The strength of competition in the industry;
The Threat of Substitution: The extent to which different products and services
can be used in place of those in the local economy; and
The Threat of New Entry: The ease with which new competitors can enter the
market if they see that good profits are being made (and then drive prices down).
By thinking through how each force affects a local economy, and by identifying
the strength and direction of each force, it is possible to quickly assess the strength
of the position and ability to make a sustained profit in the industry. We can then
look at how to affect each of the forces to move the balance of power more in favour
of the local economy.

Source:
(7)
www.mindtools.com
For more information on this tool, and on Michael Porter’s approaches to competitive analysis, read Competitive
Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter.


Fleshing Out Opportunities for Job Creation
When a competitive analysis is done, it shows up areas where local businesses can
expand and create clusters or add value. Making sure that the appropriate services
and business support infrastructure is integral to building competitive advantage.
Through these processes, local industry is more likely to build success and thereby
increase employment. AS the concept of clustering involves proximity, it is also
necessary to ensure that the skills required to build efficiency, productivity and
competitiveness are available in the local economy. When planning for expansion
of local industry, it vital to project and make provision for the skilled personnel that
will be required. As there are Sector and Training Authorities (SETAs) in South
Africa, it would be useful to engage the relevant SETA to identify the training and
standards that will be required to support industrial and other development.
While the prosperity of local industry is essential in strengthening the economy,
we need to think more broadly about ways to create jobs. You may recall that in
the first chapter we discussed how mechanisation has reduced the number of jobs in
many countries. Thus if we are to create jobs we need to look further.
Other areas that have been mentioned and can be considered are:
• Training local businesses to tender for government contracts
• Involving local businesses in development of housing and infrastructure
• Improving product quality among small scale producers
• Accessing regional and international markets for local products
• Involving training institutions in improving capacity of youth groups, crèche
operators and other community structures
• Working with casual labourers to identify private sector opportunities
• Local government sub-contracting some services to small local businesses rather
than external large businesses, e.g. renovations, cleaning, and maintenance
If local procurement agencies brainstorm the various categories of goods and
services that are purchased, there could be numerous opportunities where local
businesses could be employed. Rather than using inefficient suppliers, local business
support could be engaged to build competitiveness among local businesses.


Identifying the major blockages to investment
and poverty eradication
Investment is key to promoting growth and development in a local economy. When
a competitiveness analysis is conducted, opportunities for extending the value chain
through new processing or other activities are likely to show up. In addition, spatial
frameworks are likely to yield land that could be used for further development.
In linking to areas of potential there are numerous LED strategies that municipalities
can adopt that will result in the desired developmental outcomes of poverty
eradication, job creation, the broadening or transforming of local economies, and
the redistribution of incomes. Some of the strategies which could be used are:
• Linking profitable growth to redistributive development/financing.
• Making explicit linkages between ‘living wages’, human capital development
and productivity.
• Development and maintenance of infrastructure and services.
• Plugging the leaks in the local economy, and
• Retention and expansion of existing businesses.
The optimal LED strategy will vary depending on local circumstances and will
in part reflect what has been inherited, for example apartheid era biases must be
considered so as not to amplify the inherited patterns of the past. Consideration
of constitutional mandates and political priorities must be taken into account.
Municipalities should conduct sufficient research and consult broadly, garner
support, buy-in and ownership from all stakeholders to ensure these issues have
been adequately considered.
The kind of LED approach that is implemented in any area will depend on the
conditions of that particular area as well as reflect what has been inherited. Thus
understanding of the local economy will require researching the local context, local
economy and employment structure, local population and labour market
1. Local context –looking at geographical and physical features beneficial or
conducive to LED interventions and their significance regionally, nationally and
internationally.
2. Local economy and employment structure – detailing the nature and character
of the local economy including employment base, dominant economic sectors
(agricultural, formal, industrialised etc); levels of flexibility and diversification,
support mechanisms, entrepreneurial climate.
3. Local population and labour market – pertaining to demographic trends, incomes,
quality of life, cultural characteristics and the interrelatedness of the sectoral,


labour market, social affairs and education policies.
All municipalities developing LED interventions should engage in the identification
and audit of local resources. Such audit will reveal potential and guide existing
investors in making informed investment decisions assisted by the full knowledge
of what is available – for example, what natural resources (i.e. water) kinds of firms
located within the municipality, social services and other services are available.
Selection of suitable sectors for involvement is one of the important factors that
determine whether the objectives of the LED strategy will be achieved. An LED
strategy can be a choice between growth and employment and this has implications
for targeting one sector or another. Thus, initiatives to foster growth have to comply
with the demand of being broad based, equitable and have to balance the interests
of present as well as future generations.
The participatory methodology (8) offers the following services:
• The mobilization of local LED stakeholders
• The identification of feasible LED-initiatives
• The improvement of communication and interaction between local stakeholders
• The transfer of knowledge on LED process management to the local level
• The alignment of the perception and understanding of LED between different
stakeholders
These services enable local stakeholders to start organic LED processes,
characterized by more professional process management, a clear and continuous
interaction between public sector, private sector and civil society as well as by an
effective institutionalization (use of services).
Participatory methods combine a number of elements to create an innovative
approach to launch and sustain LED initiatives:
• the Systemic Competitiveness concept, in particular its emphasis on the role of
actors and of appropriate governance structures,
• a variety of elements from strategic management, like the 5 Forces Analysis, and
from Michael Porter’s work on localised competitive advantage,
• the discussion on market failure and market adjustment as a guiding principle for
business promotion,
• the Moderation Method, i.e. a communication tool where workshop participants
write on cards instead of just talking,

Source:
Results and Lessons Learned from PACA in South Africa: A Summary of the PACA Learning Cases of Ilembe
(8)

District Municipality and Mbombela Local Municipality, A Ruecker & S Fiedeldei (December 2004)

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